Yes, absolutely this is the way to go. It works well for gasoline, for instance.

What prevents an electric company from significantly raising prices for a day to catch people off guard? I can't exactly switch electric companies to punish them.

It also gets harder to game this system as distributed generation gets better penetration. The optimal thing to do as a residential energy provider is also naturally stabilizing for the grid. If a cabal of generators acts to restrict supply and artificially raise the price, then everyone who isn't a member of the cabal makes a killing selling energy into the market.

Its also hard for a cabal to squeeze residential providers out of the market through lower prices. Distributed generation is a small fraction of any individual provider's income. In most cases, a residential provider is paying for their system over several years. So in order to squeeze them out, a cabal would also have to sustain a campaign of artificially low prices for a span of years in order to have an impact.

Distributed generation means that there is a pool of small independent suppliers whose rational choice always acts to counter the actions of any oligopoly that attempts to form.

So if the extended market prices are high enough, then this acts as a signal to add generation and/or distribution capacity. Likewise, if the extended market prices are low enough, this acts as a signal to retire capacity that has a higher operating cost/lower profit margins.